On the 26th of June 2016, the UK, on a wave of nationalist sentiment, decided to end its 46-year association with the European Union single market. This came as a shock to the world, with both the stock market and Pound Sterling tanking to record lows. With Boris Johnson at the helm, things look more dire.
Almost 3 years to that fateful day, the UK seems to be no closer to confirming its departure than it was the day the final ballot was cast. Instead, it could be argued, there is even more of an uncertainty today, with power struggles, resignations and a feeling of betrayal sweeping through Westminster. The deal negotiated by outgoing Prime Minister Theresa May was on all account the best deal the UK could have gotten. Despite this, the deal was repeatedly rejected on the floor, eventually playing a role in May’s departure.
During the third parliamentary defeat, the vote considered only the withdrawal agreement: consisting of the divorce bill, citizen’s rights and the Irish border. The previous two defeats were on the whole package. The government is working to come up with a fair deal to avoid UK from crashing out which could terribly harm the UK’s economy. The main reason for the recent parliamentary defeat is “the controversial backstop” which guarantees an open frontier between the Northern Ireland in UK, and EU member, the Republic of Ireland. This is deemed necessary because of the different tariffs and regulations likely from the UK’s exit from the Single Market and customs union. Furthermore, it is described as an insurance policy, should the future talks fail to produce a fair-trade agreement. This mechanism was the point of mass criticism according to some MPs of May’s conservative party that felt it to be a “bad deal” which also led to the resignation of some of the ministers. After the third defeat, May’s conservative party put forward a vote of no confidence in Theresa May’s leadership and she announced her resignation on 7th June, 2019. The subsequent intra-party elections saw Boris Johnson emerging as the leader of the Conservative Party and thus as the Prime Minister of UK.
Boris Johnson, Now What?
Post Theresa May, the need for a decisive leader has become even more urging and it paved the way for the election of Boris Johnson. The election of Boris Johnson has fundamentally changed the dynamic as he has lot of appetite for a conflict, but investors and traders don’t have it and they are running fast for the exit door. Recently Pound Sterling slumped by more than 3 percentage in just a few days on reports that Johnson will not meet the European Union leaders until they are willing to abandon the Irish backstop which is part of the agreement. However European leaders are not backing off and this has increased the odds of a no deal Brexit by October 31 which could be calamitous for British economy. For the first time since October 2016, the Pound slumped for four days in a row and it seems the freefall is not going to end soon. The crucial level for GBP/USD is 1.1841 that was last seen during the Brexit referendum time.
Boris Johnson is known to be an ardent supporter of the Brexit cause. Many fear that his hard-line approach to the deal would lead the UK leaving the EU in a form of ‘no-deal’ Brexit. This means that there would be no agreements on the table for the UK’s future relationship with the EU and each issue would be individually negotiated. Boris Johnson’s close relationship with US President Donald Trump would suggest he is in favour of increasing the trade between the UK and the US and dispersing the EU trade volume across multiple trade deals with different international blocs. Yet, a no deal Brexit would cause chaos at the border, with trade in and out of the UK being severely affected.
Does the UK have the Heft?
In the event of a no deal Brexit, European Union will not face any trade disruption with non-EU countries as all the deals have been concluded by the negotiation team of the larger continent itself. It should be noted that European Union has some sort of trade agreement with 54 nations across the globe. None of them are expected to be impacted by Brexit, in fact the presence of prior trade agreements might help EU companies to take some market share from UK corporations.
On the other hand, the same might not be true for UK in the event of a no deal Brexit. Let us not forget that the EU even without UK is a $ 15 trillion economic block with 500 million customers while the size of the British economy is just $2.6 trillion. Obviously, the UK doesn’t have the heft of a large economy and this is going to impact its negotiating power which could result in lower quality trade deals. A recent example being Canada and Australia prioritizing their negotiations with EU rather than UK. Many of the trade deals that UK want is likely to get stuck in ‘rules of the origin’ issue since UK currently sources a lot of raw materials from EU to meet its export requirements.
Many have predicted medicine and food shortages as the UK relies on the EU for an estimated 70% of its food imports. A no deal Brexit could see a repeat of 2016, wiping out any recovery the GBP has made in the last three years. The current sentiment in Westminster is against a no deal Brexit, yet Boris seems to be leading the race for the Prime Ministership.
Corporate Reactions
The uncertainty surrounding Brexit are already being felt across the corporate world, with many multinationals headquartered in the UK relocating to the EU to avoid Brexit complications. Airbus CEO Tom Enders was vocal in his criticism of the current state of Brexit negotiations, warning that the company could be forced to shut down plants in the UK. “We, along with many of our peers, have repeatedly called for clarity, but we still have no idea what is really going on here,” he said.
The state of chaos and uncertainty hasn’t just affected international companies. British lender Barclays has moved £166 billion of client assets to Ireland due to Brexit uncertainty.
With the deal struck by Theresa May repeatedly failing to make it through the house and the almost imminent arrival of Brexiteer Boris Johnson; all signs currently point towards a no deal Brexit. Extended delays around Brexit have meant most major companies have contingency plans in place or in progress. With members of the negotiating party having to un-ironically deny the country descending into a Mad Max style dystopia post a no deal Brexit, one can only hope the reality is half as optimistic.
* Any opinions expressed in this article are the author’s own
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